17 Oct 2017

San Diego loses against Met. Time for solutions?

Back in 2003, I was working over the summer after my first (very tough) year in graduate school at UC Davis when I got to talking about a fight over water and money with Richard Howitt, a professor in our department. That fight had begun in the early 1990s when some member agencies of the Metropolitan Water District of Southern California (Met) had been unevenly ("unfairly") protected during the 1987-1991 drought.

That conversation got me curious about the origins of the fight and my quest for an answer eventually  led to my doctoral dissertation, Conflict and Cooperation within an Organization: A Case Study of the Metropolitan Water District of Southern California, in which "I show that Met is inefficient by demonstrating that its members have heterogeneous preferences over outcomes: Members that are more dependent on Met prefer policies that increase water supply; others prefer lower rates... If Met is inefficient as a cooperative, we should see evidence of this inefficiency, and Met's pricing policies (setting annual prices in the prior year and selling water for the same price to all locations) provide this evidence. With increasing water scarcity, the damage from these policies is growing... I describe how marginal water can be auctioned after inframarginal, lifeline water is allocated..." such that allocations are both fairer and more efficient.

The upshot of all this is that Met was in the middle of a civil war, with San Diego being the most obviously upset about its policies and other members suffering from the same worries or from the conflict. Those "organizational frictions" (further explored in this chapter [pdf]) meant that my auction solution (mentioned above and published here [pdf]), which required cooperation among Met's member agencies, was premature.

That is, until a few weeks ago, when TL sent me this article reporting that San Diego had finally lost its appeal on the allocation of costs (and water) at Met, which means that Met's existing postage-stamp-pricing system for allocating costs and its "maybe historic, maybe not" system for allocating water was recognized as legitimate.

But legitimate -- as anyone reading the tax code would attest -- does not mean either efficient or fair.  What it does mean is that Met now has clear control over water and cost allocation, which will allow it to consider better ways to manage the water and expenses its member agencies share.

What newer better way might they look into? My suggestion for auctioning water among member agencies with consideration for historic rights (so-called "preferential shares"), changing water demands, and varying levels of dependency on Met (some agencies get all their water from Met, some less than 50 percent). The whole proposal is in Chapter 7 of my dissertation.

Bottom Line: The end of Met's civil war does not mean that Met should stick with its flawed formulas for allocating water and costs. An internal market for Met's water would bring agencies more flexibility and reliability at a lower and fairer cost. More importantly, it would reduce conflict at Met and bring many benefits to the 20 million people of Southern California who depend on Met's imported water.

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